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Supreme Court sides with Slack, putting direct listings in jeopardy
- tedunangst 3y agoPeople will continue to buy in to direct listings because they want to believe.
- slotrans 3y agoAbsolutely the wrong interpretation of this decision. Read the June 1 "Money Stuff" instead.
- btown 3y agoHere's the Money Stuff article: https://archive.is/qVei5#selection-4231.0-4231.5 https://archive.is/qVei5#selection-4231.0-4231.5 > And so what happened in Slack is that, on the first day, roughly 118 million shares were available for sale under Slack’s registration statement, and roughly 165 million shares were available for sale without registration. And if you bought stock, there was no way to know which kind of stock you bought: You didn’t buy directly from the company in an IPO process; you just bought on the stock exchange from an anonymous counterparty. If you bought “registered shares,” then technically you are allowed to sue Slack under section 11, just like in an IPO; if you bought “unregistered shares,” then you are not, just like in a mature public company. But there is no way of knowing which one you bought, so in practice you can’t sue under section 11. I don't see how this is materially different from Axios' analysis?
- crazygringo 3y ago> I don't see how this is materially different from Axios' analysis? Because Axios is saying: > This raises major questions about the future viability of direct listings, which some companies believe are a more efficient alternative to IPOs. / In practice, SCOTUS told investors in direct listings that they should not rely upon information contained within stock registration statements. Given that giant warning sign, it's unclear why anyone would buy into a direct listing, and thus why any company would attempt one. But this is ignoring the fact that you can still sue under section 10 (regular securities fraud) as opposed to section 11 (IPO fraud), which the Money Stuff article explains. People will be no less willing to purchase shares in a direct listing than they are to purchase shares in any public company any day of the week. Axios is claiming this will be a death knell for direct listings (their editorial opinion), while the Money Stuff article comes to no such conclusion. That's the material difference.
- lolinder 3y agoMoney Stuff doesn't say it'll be the end of direct listings, but they do say that section 10 is much harder to sue under and therefore removing section 11 limits the company's liability a lot. It doesn't seem that far fetched to go from there to "so investors will avoid the risk".
- crazygringo 3y agoBut it's still the same risk of normal everyday trading of shares. So it does seem pretty far-fetched to me. If you followed that logic, the entire stock market would grind to a halt.
- lolinder 3y agoIt's not quite the same, because with other stocks you have months or years of past performance to go on.
- psidebot 3y agoBut it also seems likely that companies will decide to take advantage of the reduced liability (especially now it's confirmed and not just theorized) and investors will just price in the risk difference.
- jquery 3y agoIn such a situation, honest companies will get hurt and dishonest companies will get helped. How is this good for the ecosystem? Reminds me of crypto ICOs.
- grumple 3y agoPresumably this isn't actually true though? Like if you buy 5 shares, someone else's brokerage account goes down by 5 shares at the same time. The transaction is recorded on both sides, isn't it? Should be possible to establish who the seller was.
- SamReidHughes 3y agoIf you make a mid-day order on an exchange you would be able to trace the transaction to a specific buyer and seller, because a specific counterparty got matched with your order. But if you exercise an option, or buy at the opening or closing auction, the shares are naturally commingled together.
- HWR_14 3y agoI thought options were also explicitly assigned for fulfillment (randomly among those matching) so you could match it to specific shares if you wanted.
- SamReidHughes 3y agoBrokers get told how many assignments they need to make and then they hand them out randomly to their customers. My impression was that the number of exercises gets added up by the OCC and there is no chain of permutations recorded tying an individual exercise to an assignment from one broker's customers to another. My belief here is based solely on having read some documents about the assignment process and having seen no reference to such record-keeping.
- HWR_14 3y agoAh, I didn't realize the OCC commingled everyone's orders like that. Somehow I thought they were acting as an insurer on a bunch of 1 on 1 transactions. But I'll admit my understanding is probably incorrect in light of your specific knowledge.
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- Sniffnoy 3y agoIf you're referring to an article that's online, it would be helpful to link to it. It would appear to be this one: https://www.bloomberg.com/opinion/articles/2023-06-01/ai-bots-are-coming-to-finance https://www.bloomberg.com/opinion/articles/2023-06-01/ai-bot...
- Tyr42 3y agoI think most of us get it via email as you can avoid a Bloomberg subscription that way. But yes, I think that's the one.
- puzzledobserver 3y agoIs it just me, or are newspaper articles surprisingly difficult to read? From what I understand: 1. Instead of a traditional IPO, Slack went public through an alternative process called a direct listing. 2. As part of its direct listing, Slack sold some million "registered" and some million "unregistered" shares. 3. What are registered and unregistered shares? I could not find an explanation on Wikipedia. 4. Fiyyaz Pirrani purchased some number of shares, but later complained that Slack had misrepresented something in its declarations before going public. He filed suit against the company. 5. SCOTUS says that because Fiyyaz Pirrani could not tell which of his shares were registered and which were unregistered, he could not prove standing(?) 6. This problem would not have arisen with an IPO (because?). On the other hand, similar doubts will arise with all future direct listings, making investors hesitant to purchase shares in the corresponding companies. Is this an accurate assessment? What are registered and unregistered shares?
- texuf 3y agoRead Matt Levine’s newsletter today, he breaks it down better than anyone.
- deleted 3y ago[deleted]
- ThePowerOfFuet 3y agoLink?
- bradleyjg 3y agoRegistered shares are essentially shares offered for sale by the company and certain insiders. Unregistered shares are everything else. Slack was probably selling shares on behalf of non-executive shareholders for unregistered part.
- tansan 3y agoSo it sounds like IPOs are basically preventing employees from dumping and it also sounds like other non-employees or registered shares can sell. Directly listing sounds a lot more fair than IPOs.
- yieldcrv 3y ago> "Naturally, Congress remains free to revise the securities laws at any time, whether to address the rise of direct listings or any other development. Our only function lies in discerning and applying the law as we find it." I really don't see how anyone that actually reads Supreme Court decisions calls this court illegitimate. They are very consistent about not being a super legislature, no matter how disruptive that happens to be. While the prior court seems to have been acting ... more like one? Its the opposite of how the media and discourse has been, but every time I read a case I just can't reach that conclusion. I just don't think this observation will be considered controversial in history books, compared to now. Congress can't reach consensus and doesn't understand the most holistic thing to do. The court stopped picking up the slack for Congress and wouldn't have been doing so before in a system with actual checks and balances. Isn't that a plainer reading of what's happening?
- deleted 3y ago[deleted]
- zeckalpha 3y agoWhen jurisprudence and the law conflict, which one wins?
- tedunangst 3y agoWhat does this mean? The courts fill in gaps in laws. If lawmakers don't like the result, they can make new laws. It's a cycle. Law -> interpretation -> new law.
- zeckalpha 3y agoWhen the laws conflict, the courts make a decision. Subsequent court rulings generally follow that same decision. I meant to say stare decisis.
- satvikpendem 3y agoKeep in mind that unanimous rulings are the plurality of rulings, with more controversial rulings like 5-4 ones are much rarer.
- rkunde 3y agoUnless something on the regulatory side changes, nothing will happen to direct listings. People want to own stocks that they believe will go up. That’s the long and short of it. Retail investors don’t read IPO prospectuses. Institutional investors will be more hesitant, naturally, but they have the resources and expertise to asses the risks, and any public company still has to comply with disclosure requirements, IPO or no. There was similar handwringing about companies selling non-voting shares on the stock market. Turns out most people don’t buy stock to vote it, and most people don’t vote even if they can.
- jquery 3y agoA bit of an aside, but dual class shares should have a mandatory sunset clause no longer than 5 years. That way companies still can get public money via IPO for risky initiatives without fear of a quick takeover, but you avoid a situation where a company becomes little more than a slush fund for the obsessions of a wayward CEO (Facebook).
- refurb 3y agoBut why? Buying a class of stock with no or minimal voting rights is known upfront. You don’t have to buy them and presumably they are price to take into account the lack of voting power.
- vkou 3y agoWhy should we protect FB's investors from themselves? And given the tiny spread in how voting versus non-voting shares trade, it doesn't seem that investors value voting rights very much.
- eganist 3y agoI don't know that this is the right counter-argument against the point parent comment made. This counter argument is defeated pretty easily by pointing at all the other regulation that applies to public markets that private offerings (and thus accredited investors) don't have. Op might actually have a point here, insofar as it would apply to public stock. If such a class separation exists with private stock, that's a risk an accredited investor is probably either good to understand or flush enough with cash to be protected. But Mark cratering stock that moms and pops bought into, that's a good fit for regulation like anything else involving public markets.
- mayoff 3y agoSupreme Court opinions are usually pretty easy to read. There’s also a “syllabus” that summarizes the decision, although it’s sometimes harder to understand than the opinions. Here are the syllabus and opinion for this case: https://www.law.cornell.edu/supremecourt/text/22-200 https://www.law.cornell.edu/supremecourt/text/22-200
- wolverine876 3y ago> "... Our only function lies in discerning and applying the law as we find it." The judiciary has other essential roles, including adapting laws to new circumstances, justice, fairness, and mercy. The judiciary fails when it hurts people or causes injustice simply because Congress didn't anticipate some circumstance (and obviously Congress can't anticipate every circumtance). They pull out the claim above when it suits them, and then are expansive about US tradition, Congress's 'real' intent, etc. when it suits them.
- SpicyLemonZest 3y agoBut the judiciary also fails, and arguably fails worse, when they make people believe that the law is a game of Calvinball and there are no rules beyond "most sympathetic party wins".
- wolverine876 3y agoWho here or anywhere has advocated decisions based on 'most sympathetic'?
- zdragnar 3y agoYour earlier criteria of "fairness" and "mercy" certainly apply.
- wolverine876 3y agoThose words mean different things.
- miley_cyrus 3y ago"The judiciary fails when it hurts people or causes injustice ..." Totally disagree. The judiciary should not make up law. They are 9 people who have not been elected, have life terms, and have zero accountability to the people. If there needs to be new law, that responsibility should fall on our elected representatives, in other words Congress.
- olliej 3y agoSo what it sounds like to me is that unregistered shares exist specifically for the purpose of fraud - you can’t tell whether you’re buying registered or unregistered, so presumably you’re going to only ever be able to get unregistered ones. The only reason to do this is so you can put fraudulent info in the prospectus in the knowledge that the only people getting registered shares are those who are in on the fraud, and none of the victims can sue you because of magic fraud reasons.
- SpicyLemonZest 3y agoYou've misunderstood what the registration is. All of the shares which Slack sold in the direct listing were registered - but the direct listing process allows employees (and other insiders) to sell their preexisting unregistered shares in the same markets.
- miley_cyrus 3y agoThis is the most one sided news article ever. There is no distinction between the securities act of 1933 and the securities act of 1934. Without presenting that, this article is willful disception. "Given that giant warning sign, it's unclear why anyone would buy into a direct listing, and thus why any company would attempt one." - How does that follow?
- dmurray 3y agoI don't agree with the conclusion in the headline that this "puts direct listings in jeopardy". It should make them more likely. It makes them more attractive to companies, and less attractive to investors. And the companies are the ones making the decisions! Investors grumble about investor-unfriendly structures from public companies all the time: dual class stock, staggered boards, executive pay. But they suck it up and buy the companies at the same prices anyway. And it's not like this ruling gives companies carte blanche to defraud investors - in fact it's specifically about protecting companies that make a good faith mistake. So investors can't make direct listings unpalatable. Who can? An act of Congress, or perhaps the SEC finding a way to make these companies' lives really miserable. Or major index providers deciding they won't include companies that went public via direct listing - but even then they'll likely have to cave to investor pressure.
- diogocp 3y ago> It makes them more attractive to companies, and less attractive to investors. No, it also makes them more attractive for (real) investors. Reminder that investors own the company, so when a parasite investor joins up with some class action lawyers to sue the company, they are just looking for a cash grab at the expense of all the other investors.
- NoboruWataya 3y agoI agree that direct listing aren't in jeopardy. But the points you mention are all symptoms of the low interest rate, tech bubble environment we have been living in for the last few years, where investors have been desperately throwing money at anything that promised a positive yield. Same with cov-lite loans. It's probable that we are entering a period where investors can afford to be more picky. So companies trying to avail of structures and processes that give them more protection at the expense of investors may find their cost of capital is higher. Which is fine! Different processes to suit different issuer and investor risk profiles is no bad thing.
- drumhead 3y agoTime for Congress to step in and clarify the issue, which is unlikely considering how divided they are over everything. The only outcome is not to buy from a direct listing.
- tomp 3y agoThis is a bit of a stretch. Congress is divided over divisive issues, and unified over other issues. E.g. the first COVID legislation was passed in like 2 weeks. Hardly a sign of "dysfunctional legislators".